ETMarkets Smart Talk: Kedar Kadam list out 3 things that investors should track from FM speech on 1st February

In an interview with ETMarkets, Kadam who has more than 14 years of work experience in Global & Indian Capital Markets said: “The spending patterns in previous pre-election budget years indicate higher allocation to infra, mainly rail & road, and higher allocation towards rural spending and welfare measures (health & education)” Edited excerpts:

The new year started off on a muted note amid weak global cues. But benchmark indices have managed to hold on to crucial support levels. Do you think a pre-Budget rally is in place?
The year gone by has been highly volatile and jittery for domestic equity markets driven by a multitude of global and domestic macro headwinds.

However, despite these challenges, the Indian markets showed remarkable resilience and outperformed the global markets significantly.

This outperformance has widened the valuation gap between India & other emerging markets (EMs) making the latter more attractive.

Thus, we see limited room for multiple expansions. Even though India should be one of the less affected economies, due to the spillover effect of an expected global slowdown, we do not expect it to remain fully immune.

Given the slowing global growth and delayed impact of monetary tightening, we see rising risks to expected FY24 real GDP growth. The CY’23 will be the penultimate year before the general elections in India in CY’24.

Hence, it is likely that the government will focus more on rural spending, and the Union Budget at the start of Feb-23 may give a sense of it. Thus, we remain cautiously optimistic about CY’23.

What are your expectations from Budget 2023?
In our view, the key things for investors to look out for will be:i) the government’s commitment to the fiscal consolidation path,
ii) Considering spending priorities on Capex, manufacturing incentives, subsidies, and welfare, and
iii) the supply of government bonds that the market may be able to absorb.

The spending patterns in previous pre-election budget years indicate higher allocation to infra, mainly rail & road, and higher allocation towards rural spending and welfare measures (health & education)

Which sectors are likely to be in limelight in Budget 2023?
We prefer not to count on a big step up in spending by the government to select our preferred sector as we do not foresee a big increase in government spending, given the fiscal situation and any higher allocations to rural/welfare schemes may not materially impact earnings for the listed corporates.

Although going by the past trends, we expect Infrastructure (rail, road), Healthcare, Housing, and textiles to be key discussion points in Budget 2023.

Which sectors will lead markets in 2023 – will the winners of 2022 continue to dominate market action in the new year?
We expect the opposite. We expect the losers of last year i.e. IT & Pharma to dominate market action in CY’23. We see risk rewards favorable in these sectors given attractive valuations and better earnings visibility.

Besides IT & Pharma, we like Infra & Capital goods, Cement, Sp. Chemicals and select large banks.

What do you make of the December quarter results from the IT sector? What is your pecking order?
We maintain a positive view of Indian large-cap IT, given attractive valuations and upbeat management guidance. Though we are closely monitoring the geographic exposure of these companies and trends in order inflows.

Where is the smart money moving in 2023? Have you spotted any early trends?
We expect India’s strong economic momentum to continue its upward journey in CY’23 albeit at a slower pace on the back of limited fiscal space & slower global growth.

India’s strong FX reserves, tax collections, well-managed budget gap, relatively strong GDP growth & higher real yield are likely to hold up the macros in CY’23.

However, in the short/ immediate term, we expect lower returns across asset classes (bonds, equities, real estate) in an era of rising interest rates compared to an era of low-interest rates in the past three decades.

The expensive valuations of the Indian market and of ‘growth’ stocks pose risks to market performance.

We believe CY’23 to be a stock picker’s market, and suggest investors use any dips in markets to add quality stocks with reasonable valuations, high earnings visibility, and balance sheet strength.

Which sectors are you overweight and underweight on in 2023?
We remain overweight on IT, Pharma, Cement, Infra & Capital goods and sp. Chemicals. While we remain cautious on midcap banks, metals & mining, and Auto OEMs.

What do you make of the huge SIPs coming into MFs which has now consistently hovering above Rs 13000 cr. There is a lot that has to unfold for Indian equity markets. What are your views?
Yes, the trend of “Financialization of savings” should continue in years to come which will lead to higher inflows into domestic capital markets.

Despite strong growth in the last 24 months, the Demat account penetration in India continues to remain low at just 7.1% as of Sep-22, compared to 14.4% in China & 65% in the US. Hence, we see significant potential to grow market participation in India.

How should one be playing the small & midcap theme in 2023. We have seen most flows coming into this category.
We see Value to be a key thing for CY’23 alongside the quality of earnings growth. We see limited room for multiple expansions amid global monetary tightening & resultant global economic slowdown, feeble consumer demand, high input costs & rising costs of capital.

We suggest investors focus on companies with high earnings visibility, sector/ business strength, and a strong balance sheet. Alternatively, conservative investors should participate through the mutual fund route.

If someone plans to put Rs 10L now in 2023 – does it make sense to go all in or via the SIP route?
India’s relative attractiveness over the medium to long term, among other factors, will depend on the manufacturing sector becoming a key driver of growth (PLI and China+1), and private sector investment cycle revival driven by manufacturing sector growth.

As the broader market valuations are rich, opportunities arising from market correction can be used to add quality stocks (with attractive valuations) from a long-term investment perspective. Thus, we recommend to
1) Spread out the investments and increase the pace of sharp declines

2) Have a bias towards the large-cap and large mid-cap segment

3) Focus on sectors/ stocks with high earnings visibility and moderate valuations.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)